Hyundai Family Scion Faces Losses from Lotte Cultureworks Stake After Attempt to Avoid Unfair Internal Dealings Regulation

A 2019 Strategy to Avoid Unfair Dealings Backfires

Complete Capital Erosion Last Year, Share Value Drops to a Quarter

Jeongseong Lee, Advisor at Innocean.

Lotte Cultureworks, in which Sungsi Jeong, Advisor at Innocean and sister of Hyundai Motor Group Chairman Euisun Chung, holds a stake, fell into a state of complete capital erosion last year. Advisor Jeong had exchanged part of her Innocean shares for Lotte Cultureworks stock in 2019. At the time, the industry viewed this move as an attempt to circumvent regulations against unfair internal dealings.

As a result, while Lotte has earned hundreds of billions of won in dividends from Innocean over the years, Advisor Jeong has suffered losses due to the decline in the value of her shares. The market is now closely watching whether Advisor Jeong will exercise her put option to sell her Lotte Cultureworks shares back to Lotte.

According to the Financial Supervisory Service's electronic disclosure system on April 16, Lotte Cultureworks' consolidated total liabilities stood at 705.7 billion won at the end of last year, while total assets were 673.9 billion won. The company recorded a net loss of 89.7 billion won last year alone, resulting in complete capital erosion.

Lotte Cultureworks was established in 2018 through a physical spin-off from Lotte Shopping. The company operates multiplex cinemas such as Lotte Cinema both domestically and overseas, and is engaged in film investment and distribution. The main reason for the capital erosion is the poor performance of Lotte Cinema Vietnam Co., Ltd. As of the end of last year, this subsidiary was experiencing capital erosion of about 200 billion won.

The second-largest shareholder of Lotte Cultureworks is Advisor Sungsi Jeong at Innocean, who owns 13.63% of the company. In 2019, Advisor Jeong contributed and sold 2,060,000 shares (10.3%) of her Innocean stake to Lotte Cultureworks, receiving cash and a 13.63% stake in Lotte Cultureworks in return.

The industry interpreted Advisor Jeong’s transfer of Innocean shares as a move to avoid the Korea Fair Trade Commission’s regulation on unfair internal dealings. The Fair Trade Commission expanded the scope of regulation from affiliates where the controlling family owns at least 30% to those where they own at least 20%. At the time, Advisor Jeong held 27.99% of Innocean, but by transferring 10.3% to Lotte, she was able to avoid the regulation.

After the share swap, Innocean was able to continue its internal transactions with Hyundai Motor Group. Last year, Innocean’s total sales to related parties amounted to 1.547 trillion won, accounting for 72.1% of the company’s total revenue.

Based on this stable performance, Innocean has paid large-scale dividends every year. As a shareholder, Lotte has also received significant dividend payouts from Innocean annually. From 2019 to last year, the accumulated dividend income amounted to 34.3 billion won.

However, the value of Advisor Jeong’s stake in Lotte Cultureworks has consistently declined. When Advisor Jeong received her 13.63% stake in Lotte Cultureworks, its value was about 108.8 billion won. Based on the book value of Lotte Cultureworks as assessed by Lotte Shopping at the end of last year, her stake is now valued at about 27.7 billion won.

As a result, the market is focusing on whether Advisor Jeong will exercise her put option on Lotte Cultureworks. Advisor Jeong has the right to sell her shares back to Lotte Cultureworks if the company fails to go public (IPO) within a certain period. It is known that this contract has been extended on a yearly basis.

A source from the investment banking industry said, "Since the MOU for the proposed merger between Lotte Cultureworks and Megabox JoongAng has been extended until June 30, it will only be after more information emerges that the direction of Advisor Jeong’s stake will become clear."

This content was produced with the assistance of AI translation services.